heuristics - Ryan Maroney FI 320 Heuristics of Behavioral...

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Ryan Maroney December 17, 2009 FI 320 Professor Read Heuristics of Behavioral Finance Current forecasts that predict the fastest US earnings growth in 15 years are failing to convince options traders that the Standard & Poor’s 500 Index will actually extend what is currently its biggest streak since the 1930s. The option writers believe that the concept of anchoring has caused the public to place too much relevance on the current performance of the S&P 500 in determining how the index will perform in the upcoming year. In order to protect against the decline of these stocks in the next year, the these S&P 500 options cost 22% more than one-month contracts, which according to Bloomberg is the largest gap since 1999. This large premium has led some analysts to estimate that the future return on the S&P is overrated due to the fact that it is up 63% since March and many people would assume it would only continue to improve as the recession fades. One expert in particular, John P Hussman, whose $5.5 billion Hussman Strategic Growth Fund beat 99% of peers in 2008, believes there is an 80% chance that the equities will actually fall back to their march lows due to a weakened global economy. Even though GDP increased by 2.8% in the last quarter (after being negative) and is expected to continue to increase at that rate of 2.8% through March. Even with all of these
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heuristics - Ryan Maroney FI 320 Heuristics of Behavioral...

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